People like to justify and assert things in uncertain and troubled times. This often leads to misunderstandings and lack of accuracy. Many examples include the 2008 financial crisis, QE and the pandemic.
Now, , with a few banks currently in crisis, not a banking crises as such, and the crypto-world in flux, the end to the US dollar’s dominance is getting a new airing. Nothing could be further from truth.
Fareed Zakaria, an American commentator posted a five minute video on social media this week warning that the US dollar’s dominance at the top of the global financial system is ending and that it would cause chaos in the United States. Although it is a popular view on social media, it is highly misinformed.
This argument revolves around the rise in use of the Chinese Yuan to denominate SinoRussian trade. Russia Today reports that the yuan’s participation in Russia’s export and import settlements increased to 23pc, 16pc, respectively during 2022, up from 4pc or 0.5pc.
This is in addition to other initiatives that promote the yuan. China has set up emergency yuan swap lines with other central banks to promote local currency trade financing, which bypasses the US dollar.
It is currently developing its own international payment infrastructure to be sanction-proof in the event of punitive actions being imposed on it, such as over Taiwan’s threats.
It also encourages Saudi Arabia and other oil-producing countries to adopt the “petroyuan”, which is a Chinese currency that prices oil.
These “talking points” can be dismissed as either naivety or misunderstandings.
The yuan is not used to settle additional bills. Russia has a greater use of the Yuan in trade. This is due to its inability to freely access US dollars and its status of a vassal country of China.
The issue for yuan recipients is whether to keep their currency, which is rarely used worldwide, or sell it for easily tradable currencies that have transparent and open financial architectures.
A petro-yuan is also an idea that has never been realized.
Xi Jinping, who was visiting Saudi Arabia in the latter part of 2022, requested that Riyadh accept oil in yuan.
It is unlikely. It is unlikely to happen. Most oil producers have their currencies pegged to the US Dollar and therefore need US dollars reserves.
Zakaria used the argument that the US balance of payment deficits and growth in US domestic debt can only be achieved because the US dollar is the dominant currency.
It is actually the dominance by the US dollar in global economic and ease and trust with the purchase of US assets that causes the US to have higher debts and deficits.
Balance of payments accounting is a tyranny that means that if China or other countries have surpluses because of relatively weak domestic demand others, such as the US and UK, must run external deficits. This will cause them to accumulate debt. The right way to look at cause and effect is the other way around.
The idea that the Yuan could become an international currency, possibly a rival to US dollars, is not a true story.
This could only occur if China allows other countries to hold large claims in yuan.
This means that China must either run external deficits or it will be relegated to a mercantilist state that is focused on industrial policy.
Or, it must allow capital to freely travel outward. This is partly because it doesn’t trust its citizens to save money and partly because the outflow and fall in the Yuan would cause instability in its $60 trillion (49 Trillion) domestic banking system, in which bad debts are already a problem.
Xi’s China has, therefore, been caught between the devilish balance of payments surpluses, and the deep blue sea, of a closed capital accounts. Companies and countries may use the Yuan more to pay and issue invoices and to sell bonds to foreigners.
However, worldwide payments accounted for 2.2pc according to SWIFT, which is a global messaging system used banks. This is largely the same percentage as two years ago.
With respective shares of 41pc & 36pc respectively, the US dollar and euro dominate.
China’s messaging system is still in its infancy and depends on SWIFT technology. Although China is making progress with its international payments system, the challenges it faces are still very difficult.
It processes 0.5pc less transactions than the other participants, and has a tenth as many participants.
Important institutional properties are also required for proper reserve currencies. These properties include transparency, trust, predictability and sound governance.
While digital currencies might improve the efficiency of payment, they won’t change these features.
Although the US dollar ticks all of these boxes, it’s not the only currency that does. According to the IMF the decline in US dollar’s reported global reserves, which was around 70 percent in 2000, to 60 percent now, is mainly due to non-traditional currencies like the Australian and Canadian Dollars, the Korean won, and the Swedish Krona.
Although the yuan has played a greater role, it accounts for less than a quarter the shift from the US dollar and about 5 percent of global reserves.
Since the financial crisis, China has been trying to move away from a US-dollar-denominated currency system. However, there is no indication that this will happen in the near future. Perversely, however, the US would be the main beneficiary.